I bang the drum about making decisions based on your financial metrics. One of the most critical numeric for developing strategy is your cash flow analysis. To illustrate my point, I’ll share a story a friend of mine told me.
He once worked for two brothers who owned a company. One was a salesman; a gregarious, team motivator who always had a smile on his face and was not shy about promising the world.
The other brother managed the company’s finances. He let his happy-go-lucky brother promise the moon, but in the end, he pulled him back to reality and made decisions based on the company finances.
The business was successful because the two brothers worked so well together. But what specifically did brother #2 use to reel in his promise-the-moon partner? The cash-flow analysis, of course.
Cash flow says yes…or no.
The cash flow analysis really is the true driver of your strategy. For example, if you’re producing a product that makes $2,000 per month, you can’t incur a debt of $3,000 on new equipment. If you do, you’ll have to make adjustments to either your sales price or your operating costs.
Think about it from a bank’s perspective (applicable if you have a business loan). The bank looks at cash flow analysis and wants to know if a debtor will be able to repay the loan, when, and in what amounts. From that information, it then knows whether to extend the loan, modify the loan or retreat if the loan is unrecoverable.
It’s up to you to ensure that cash flow analysis is accurate and be honest about it. If you know realistically you can increase sales on a monthly basis of 2%, you don’t do the business any good by increasing it by 5%. Or, if cost of goods increase, you can’t artificially insert a cost factor increase of 2%. You’re fooling no one.
The cash flow analysis dictates what’s real, and what’s right, for your business. Listen to what it has to say – it speaks loud and clear.
Photo by: sunshinecity